The Profit Compression

The bad news is independent agency profits are and will continue to be compressed. The good news is that for independent agencies willing to abandon the traditional model, great opportunity exists.

Profits will stay compressed because revenue increases will be suppressed unless new account sales are made. Revenue will be suppressed because of the following.

Predictive Modeling. Predictive modeling requires a company to choose a loss ratio. My guess is most companies are choosing around a 55 percent loss ratio. A major misconception agents have is that companies all want great loss ratios. If all companies aim for a 55 percent loss ratio, but if one achieves a 45 percent loss ratio, that company will likely have charged more than other carriers (or somehow developed a much smarter predictive modeling system), thereby losing market share.

Companies only want really good loss ratios if those loss ratios do not cost them market share. Agents don’t often understand this point.

Only four solutions will solve profit compressions; the hard market isn't one of them.

The problem for agents is that a 55 percent loss ratio is often out of the money for contingencies. On the other hand, if predictive modeling fails, loss ratios will likely rise even further, so agencies will still be out of the money.

If companies using predictive modeling gain market share and your companies do not use it, you will lose commissions and contingencies.

Activity Based Rating. The best example of activity based rating is personal auto policies based on driving habits. Commercial auto policies will follow. As much as insurance companies have historically tried, they have never previously succeeded in rating the best drivers low enough and the worst drivers high enough.

This new technology seems to be a leap forward. Because independent agencies generally write more good drivers than bad drivers, the result will be lower rates for their drivers and lower commissions.

Carrier Results. Such considerable disparity exists between different carrier’s results that not all companies need to increase rates. Additionally, the industry has a record amount of surplus. The strongest carriers then may prefer to let their loss ratios rise a little while grabbing market share from the carriers that truly need rates to increase materially.

Revenue is suppressed for all these reasons, and yet agency expenses will continue to rise. Quality people will cost more.

Advertising and producer development will cost more. Meanwhile, IT and agency management expenses are not going to decrease.

Most agency owners will not do anything with these facts. Even if they agree with these facts, they will not execute the necessary changes. For some, complacency has gone too far.

Historically agencies have sloppily executed plans. Even today, 80 percent of agencies still do not require producers to follow the agency’s procedures. For others that recognize the reality, the execution required is too difficult and too overwhelming.

Others, however, will tackle this opportunity. Understanding that execution is difficult, due to the personalities of many agency owners. They feel the urgent need to progress and they are excited about the opportunities presented. They understand that their personality that made them successful, yet they also know that the personality that led to success is now limiting their future.

Solutions

When profits are compressed, only four solutions exist.

First, sell out.

Second, ride the horse to the ground.

Third, build a niche where profits are not being squeezed. This is currently a popular solution being proposed by many sales consultants.

Precise policy and procedure execution, whether staff procedures or producer sales procedures, are not only tactics most agency owners cannot deal with. Procedures are anathema to most. I am not being condescending. It is a fact.

If all agency owners were tested using a test such as Kolbe, most would be shown to be fast starts and slow follow-throughs. In other words, they are not very good at executing their ideas or plans.

The key then for moving forward and thriving is high-quality execution of plans and procedures.

For example, the insurance industry is not different than any other. When profits are being compressed, a company has to become more efficient.

To become more efficient, an insurance agency has to have good procedures for everyone. Once good procedures are in place, everyone has to follow them.

Accountability

To increase profitable sales (and the sales have to be profitable because when profits are compressed, not all sales are profitable), agency owners have to execute their producer management plans. This means absolutely holding producers accountable to make new quality sales.

If the business model bypasses producers, then make sure producers are truly bypassed and your sympathy does not result in paying them anyway.

Using a non-producer model requires even better execution because to compete against $5 billion in advertising, an agency will have to execute its advertising and marketing with extreme precision to be effective.

Accept Reality

This article is truly aimed at those agency owners who do accept reality.

Regardless of the fact that the proposed solution is easier said than done, just accepting reality is a huge progression and a gigantic advantage.

By accepting reality, instead of using all of a person’s energy to fight the inevitable, an agency principal will discover many resources to help him or her execute more easily.

In other words, agency principals don’t have to do it all on their own.

Labor unions, Detroit and a myriad of manufacturers made the mistake of believing that profit compression would not affect them. The insurance industry has hopefully learned from its mistakes, but I’m not sure.

I am sure, however, that insurance agents who “get it” have more opportunity than ever.

About Chris Burand

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. Email: chris@burand-associates.com. More from Chris Burand